Emerging markets mixed; Argentina slips as talks may begin; Gazprom prices $1.5 billion

By Aaron Hochman-Zimmerman

New York, April 2 - Emerging markets followed equities through a day that finished mixed to slightly weaker.

"There was a good amount of tightening in the last two sessions," a trader said, which left room for some consolidation on Wednesday.

"The market has been basically to the upside for the most part," said Enrique Alvarez, a Latin America debt strategist at think tank IDEAglobal.

Investors have seen a combination of "spread compression coming in from the 10-year Treasury, which has bumped out as far as yields are concerned," he said.

Also, "the risk equation has gotten more flexible," he said, adding: "For the immediate period the Fed has ring-fenced the mortgage market," which has left the market with "a better overall climate."

Meanwhile, the primary priced a dollar-denominated deal for the third straight day thanks to Russia's OAO Gazprom, which completed a $1.5 billion offering in two tranches.

In trading, Argentina slipped even as it seemed as though the striking farmers may be ready to sit down at the negotiating table.

The Argentine discount bonds due 2033 fell 1 point.

Volatility spent most of the day hovering near the unchanged mark but jumped later in the afternoon to end up by 0.75 at 23.43, according to the VIX index. The index is a standard yardstick of market volatility.

As a sector, emerging markets wound tighter by 6 basis points to a spread of 290 bps, according to JPMorgan's EMBI+ index. The EMBI+ estimates the amount of extra yield investors will require to hold money in emerging markets debt.

LatAm mixed, Peru makes high grade

Trading in Latin America was mixed to better as equities whipped around in the United States.

Peru grabbed attention by breaking through the investment-grade glass ceiling for emerging markets, as Fitch Ratings upgraded its credits to BBB- from BB+.

Usually investors look to Standard & Poor's and Moody's Investors Service for leadership in this area, IDEAglobal's Alvarez said, but "there's a well-supported case for Fitch."

The Peruvian 7 3/8% bonds due 2025 were better by 0.75 point to 133.25 bid, 114.5 offered.

Elsewhere in Latin America, Venezuela's 9¼% government bonds due 2027 were off by 0.25 point to 94.25 bid, 94.95 offered.

Also, Brazil's 11% bonds due 2040 were up by just 0.1 point at 134.1 bid, 134.2 offered. The 7 1/8% Brazilian bonds were quoted at 108.3 bid, 108.65 offered.

Farmers' strike calms again

Meanwhile, tensions over Argentina's farm strikes, which seemed to be on the wane on Monday, flared up again Tuesday as president Cristina Kirchner took a tone reminiscent of Eva Peron: "I ask you, beg you, please, lift the road blockades," she said, according to the Buenos Aires Herald.

She spoke on Tuesday to a crowd of supporters who are opposed to the farmers and their three-week strike, which has seen highways blockaded and food shortages hit the country.

In her speech, she ruled out the possibility of scrapping the sliding-scale tax program, which has sharply affected the farmer's livelihoods, the report said.

Toward the end of the day on Wednesday "it now seems that the strikers are willing to talk," Alvarez said, adding: "I'm surprised people haven't nibbled at Argentina," as the situation seemed to show more stability, he said.

The 8.28% Argentine discount bonds due 2033 were lower by 1 point to 83.75 bid, 85 offered.

Gazprom prices $1.5 billion in primary

For the third straight day, dollar deals were priced in the primary, thanks to OAO Gazprom, which a trader called encouraging.

Gazprom (A3/BBB/) priced $1.5 billion of loan participation notes over two tranches.

The $1.1 billion 10-year tranche was priced at mid-swaps plus 387.5 basis points through Citigroup.

The $400 million five-year tranche was priced at mid-swaps plus 375 bps through Morgan Stanley.

Guidance was released in the area of mid-swaps plus 400 bps for the five-year issue and between mid-swaps plus 400 bps and 425 bps for the 10-year issue.

Initially investors were expecting an issue of up to $2 billion.

The issue was offered under Rule 144A and Regulation S.

Proceeds will be used for general corporate purposes.

Gazprom is a Moscow-based government-run oil firm.

The new issue looks attractive, a market source said.

"That does sound like a lesser concession than you might have had," a trader said about the spread coming tighter than the talk.

However, "in each market you're still going to need to see supply before you express more confidence," he said about the other emerging market sectors.

Although in Latin America, General Electric Co. (Aaa/AAA/) priced 3.25 million Mexican peso 10-year global notes at 99.448 with a coupon of 8½%.

Merrill Lynch acted as the bookrunner for the registered deal.

General Electric is a Fairfield, Conn.-based electronics manufacturer.

Also, the State Bank of India informed the Bombay Stock Exchange that it has finalized a ¥12 billion issue of five-year fixed-rate bonds, which priced at par to yield 3.36%.

Settlement is expected on Tuesday.

State Bank of India is a New Delhi-based state-run bank.

Asia mixed after Tuesday rally

The market was "fairly choppy" on Wednesday for investors in Asian credit, a trader said.

"We're following equities around basically," he said.

In the Philippines, the government's sale of assets suffered due to risk aversion related to the U.S. mortgage crisis, the Manila Times reported.

The Philippines may be unable to cover budgetary shortcomings with asset sales if the present market conditions continue or worsen, according the research by the Development Bank of Singapore, the report said.

"The budget will be pressured from lower revenue collection from a slower economy, and increased government spending to support growth," the report said.

The Philippine government bonds due 2030 were quoted at 131 bid, 131.5 offered.

Elsewhere in Asia, Indonesia is still vulnerable to rising commodity prices as its population lives on less than $2 per day, the Asian Development Bank said, according to the Jakarta Post.

Inflation is forecast at 6.8% for 2008 and 6.5% in 2009, compared to 6.6% in 2007.

The country's vulnerability stems largely from a lack of "adequately paid jobs," the report said.

The rupiah was seen trading at 9,185.27 to the dollar.

The Indonesian government bonds due 2017 were seen at 104.5 bid, 105 offered.

Pakistan's sovereigns due 2017 were spotted at 84 bid, 87 offered.

Emerging Europe mixed

Emerging Europe traded mixed along with equities as they struggled to find a direction during Wednesday's session.

In Russia, the Duma passed a law regulating foreign investors' access to "strategic industries crucial to national security," according to the Itar-Tass News Agency.

Industries affected by the new legislation include energy, space, aviation and defense as well as media and communications.

Also in Russia, as it priced a $1.5 billion bond, Gazprom raised its price for gas sold to Moldova to $211 per 1,000 cubic meters of gas.

The Gazprom 8 5/8% bonds due 2034 were spotted at 113 bid, 114 offered.

Elsewhere, officials from Ukraine were in Bucharest for the NATO summit, which began Wednesday.

On the agenda was the admission of Albania, Croatia and Macedonia as well as the proposal of membership action plans for Ukraine and Georgia.

Turkey's trouble in court

In Turkey, as the constitutional court has opened the case against the ruling AK party for its alleged anti-secular and unconstitutional activities, the government is planning its strategy to remain in power, a market source said.

The president Abdullah Gul and prime minister Recep Erdogan will attempt to consolidate a 367 majority vote in parliament to amend the constitution in order to make it more difficult to ban a political party or the AK party may back off some of its support of headscarves to appease its opponents, the source said.

The trouble in the court may weaken the lira, requiring action by the central bank, a source said.

The economy has already begun to suffer from the loss of nearly $2 billion after a court decision to limit foreign direct investment in the country, a source said.

The lira was seen trading at 1.291 to the dollar.

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